Apple Inc (AAPL) stock is up on its massive buyback news - a new $110 billion program announced in its May 2 release of fiscal Q2 earnings ending March 31. This was on top of a 4% dividend hike to $1.00 annually, and $0.25 quarterly. 

The annual dividend will cost about $15..337 billion, so combined Apple will be returning over $125 billion to shareholders. These work out to 4.39% of its $2.856 trillion market cap, although that assumes the whole buyback program will take one year. Today AAPL OTM put and call options are cheap - good for long-term investors.

The stock is up 6.9% to $184.90 per share today. Moreover, today AAPL OTM put and call options look cheap - good for long-term investors.

Mediocre Results, But FCF Margins Rose

This news came despite poor top-line results. Revenue fell 4.3% from $94.8 billion a year ago to $90.7 billion for the quarter ending March 31, 2024. Moreover, its operating income was down 1.48% to $27.9 billion.

Nevertheless, the company still generated a massive amount of free cash flow (FCF). For example, its 6-month operating cash flow was flat at $62.585 billion vs. $62.565 billion a year ago. However, since its recent quarterly revenue was lower, that means its operating cash flow margin was higher. 

This worked out to 29.8% vs. 29.5% a year ago. Both of these margin numbers are very high. Moreover, its free cash flow for the 6 months was significantly higher at $58.2 billion, vs. $55.86 billion a year ago. As a result of lower capex spending its 6-month FCF margin rose to 27.7% from 26.4%.

This implies that Apple's FCF could still rise even with analysts' lower revenue estimates. For example, analysts project revenue will hit $385.78 billion for the year ending Sept. 2024 and $410.88 billion next year. So, on a run rate basis, this puts its average next 12-month (NTM) revenue forecast at about $400 billion. 

Therefore, if the company can continue to make roughly 27.7% FCF margins, free cash flow could rise to $110.8 billion over the next 12 months. So, no wonder the company feels comfortable buying back $110 billion of shares. Even if this takes 2 years, the company would have more than twice the amount of free cash flow to cover these buybacks.

Target Prices

As a result, despite the lack of top-line growth, its massive free cash flow and buybacks could easily push up the stock price. For one, if the $110 billion in share repurchases take 2 years to accomplish, that works out to a buyback yield of 1.926% annually (i.e., $55 billion/$2.856 trillion market cap).

Here is what that means. If the company can reduce its share count by 1.93% annually for five years, the share count will fall by 10% over 5 years. That is how much 1.93% compounds over 5 years (i.e., 1.0193^5=1.10- 1=10% compound annual growth rate, or CAGR). 

So, annually shareholders could expect a return of at least 2.5% (i.e., 2.0% from the buyback yield and 0.5% from the dividend yield). Moreover, if the company's FCF keeps growing This expected return could be higher.

Second, in terms of a hard price target, consider this. If we divide the NTM FCF estimate of $110.8 billion by 3.3% (30x FCF), the stock market value could be worth $3.358 trillion. That is still 17.6% over today's price. This implies that AAPL stock could be worth $217.44 per share (i.e., 1.176 x $184.90 per share today).

Analysts tend to agree. For example, Barchart's survey of 28 analysts shows that the average price target is $204.53 per share. Moreover, AnaChart, a new sell-side analyst tracking and performance site, shows that the average of 32 analysts is $185.06, and Yahoo! Finance's survey of 39 analysts is $198.90 per share. So these all average a price target of $196.16, or 6.0% higher.

The bottom line is that AAPL stock looks cheap here.

OTM Options Prices Look Cheap Here

Moreover, a quick survey of out-of-the-money (OTM) option prices in nearby expiration periods shows that both put and call options have low premiums. For example, the 3-week out expiry period of May 24, shows that a $200 strike price, which is 8.1% over today's spot price, costs just 22 cents. That is just 12 basis points or 0.119% of the $184.90 stock price. In other words, the yield is too small to sell short and likely means that buying those calls could be worthwhile, assuming the stock keeps rising.

Moreover, OTM puts are also cheap. For the May 24 $170 strike price put, 8% below today's spot price, trades for just 28 cents. This yields just 16.5 basis points to a potential short seller - not really worth the effort. It likely makes more sense just to buy those puts.

This is a much different situation from three weeks ago. At the time, on April 10, I wrote that OTM puts were worth shorting in this article, “Apple Is Showing Unusual Out-of-the-Money Put Options Activity - Highlighting AAPL Stock's Value.”

The bottom line is that AAPL stock looks cheap here. Buying OTM calls and potentially shorting OTM puts at the same (to cover the cost) might be worth the extra cash and margin that this would cost. For example, shorting the $170 put would bring in 28 cents per contract shorted, but buying the $200 call would only cost 22 cents, a net 6-cent credit per contract. However, the investor would have to own 100 shares for the covered call portion, costing $18,490, and also put up an additional $17,000 to secure the short put play (i.e., 100 x $170.00).

In the end, this might not be the best use of capital, but it could still be profitable, especially if AAPL stock keeps rising.

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